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Beyond a Steel Sky

Tata Steel Limited (“The Company” or “TSL”) is a multinational diversified steel producer with a value chain that extends from mining to finished steel products. The Company has operations spanning over 26 countries and a commercial presence in over 50 countries with key operations in India, Netherlands, and United Kingdom with 33 MnTPA (Million Ton Per Annum) crude steel capacity. In India, every 4th stainless steel utensil is made from Tata Steel chrome ore and 50% of LPG cylinders are made from Tata Steel HR (Hot-rolled) coil. Its products include flat products, including HR, Cold-rolled (CR), Construction products, Agricultural implements, and Auto assembly components.
Its brands include:

TSL primarily caters to the following market segments:

  • Automotive
  • Construction
  • Industrial and General Engineering
  • Agriculture

How was TSL Born?

Jamsetji Nusserwanji Tata, founder of Tata Group had four dreams. These included establishing a world-class learning institution offering science education to Indians, setting up an Indian Iron and Steel Company, a hydro-electric plant, and a unique hotel. Sir Dorabji Tata, and his cousin RD Tata, fulfilled Jamsetji Tata’s dream of establishing completely Indian steel Company. TSL was established in 1907 at Jamshedpur, Jharkhand. The following year, in 1908, construction at Jamshedpur Steel Works began which started pig iron production in 1911 and began producing steel in 1912. The Company made rapid progress during the First World War, and by 1939, it operated the largest steel plant in the British Empire. After 1951, the Company expanded rapidly and ended up employing around 60,000 people at Jamshedpur in the neighboring coal mines by 1970. TSL holds the distinction of being Asia’s first integrated steel Company.

Indian Steel Industry

  • The steel industry directly contributes slightly more than 2% of the GDP of the country. Since 2008, production has increased by 75% while domestic demand for steel has grown by around 80% till 2019.
  • The growth in the Indian steel sector has been driven by the domestic availability of raw materials such as iron ore and cost-effective labor.
  • India is currently the world’s 2nd largest producer of crude steel after China. India produced 111.245 Million Tonnes (MT) of crude steel in 2019 whereas China had produced 996.3 MT during the same period.
  • India is also likely to become the 2nd largest consumer of finished steel in 2019 with 101MT, preceded by China as the largest steel consumer with 907MT in 2019.
  • Government initiatives like “Make in India” and focus on infrastructure and road projects are contributing to an increase in the demand for steel. To reduce imports, GoI (Government of India) introduced a steel scrap recycling policy with an aim to promote a circular economy by producing high-quality scrap for steel production, minimizing the dependency on imports.
  • With an aim to create a globally competitive steel industry in India, Government expects to create 300 MTPA steel-making capacity by 2025 and 160 kgs per capita steel consumption by 2030-31. From 2013 to 2019 per capita consumption increased from 57.6 kg to 74.3 kg.
  • Major players in the Industry are:

Business Model

TSL’s business model involves converting raw materials such as iron ore and coal into customized steel products for its customers. The Company is focusing to cater to customers in the automotive, construction, industrial, and railway sectors. It is one of the few companies that has its operations fully integrated from mining to manufacturing and marketing of finished products. TSL has always focused on ensuring a steady supply of coal and iron ore for producing steel. As the Company refocuses its capacity expansion plans in India, the acquisition of Usha Martin Ltd. (UML) steel business has strategically enhanced its value-added long product portfolio and expanded its presence in the premium and niche segment for automotive customers. Brownfield expansion of crude steel capacity at Kalinganagar, Orissa facility from 3MnTPA to 8MnTPA, will provide value addition to the company along with operational and capital efficiency. TSL’s aim is to scale its capacity from 13 MnTPA to 30 MnTPA by 2025, by developing its outbound logistics, investing in port facilities to support its growing capacity and increasing cost competitiveness. This will further enable the Company to accomplish its debt reduction goals.

COVID-19: Navigating Unprecedented Reality

The COVID-19 has disrupted operations globally. Production facilities were completely shut-down in India during the initial lockdown. Sales volume took a hit as the crisis led to logistic issues and lower demand, amplified by the shutdown of customer operations in construction, automotive and other segments. As the Company slowly starts its production, focus on worker’s health remains the main concern for smooth operations. Tata Steel Europe (TSE) is suffering from operational challenges like production slowdown and worker strikes. The Company’s liquidity remains robust at Rs.177.45 billion with over Rs.115.49 billion in cash and cash equivalents by the end of FY20.
Going forward the Company needs to focus on conserving cash and maintaining liquidity. As demand is reduced across all geographies and market segments, lower production and sales volumes are expected especially in FY21.

Differentiating Strategies

  1. Maintaining Cost Leadership
    The Company maintains its cost leadership by maintaining a steady supply of low-cost raw materials by using its captive coal and iron ore mines in India and other countries, for its steel production, which enables the Company to service its customers without any disruptions. This strategy allows the Company to generate higher EBITDA margins than its competitors who can’t meet their raw material requirements from captive mines and have to resort to purchasing them at higher prices in the open market. On a standalone basis, TSL Steel generated an EBITDA margin of 25.2% in FY20 compared with JSW’s EBITDA margin of 20.5% and SAIL’s EBITDA margin of 18.1%. However, on a consolidated basis, TSL’s EBITDA margin dropped to 13.8% in FY20.
  1. Diversified product segment
    The steel industry is cyclical in nature. TSL’s product portfolio includes flat and long product categories and a high share of value-added and branded products. With the acquisition of Bhushan Steel (TSBSL) and also the steel business of Usha Martin Limited, TSL is further in a position to consolidate its leadership within the domestic automotive market.

SWOT Analysis


  1. Insulate revenues from steel cyclicality: In order to insulate itself from the cyclicality involved in the demand for steel due to economic boom and depressions, the Company is also focusing on strengthening value added-products and branded consumer business. It has also introduced new products and solutions made from steel (like- ‘AquaNest’ – A Water Vending Kiosk, ‘Pravesh’-Steel Door and ‘Nestudio’ – A Steel-based Smart Housing Solution) which will help in partly mitigating the cyclicality.
  2. Maintaining cost leadership position: TSL aspires to be a global benchmark in operational efficiency, and maintain its cost leadership. TSL aims to ensure an adequate supply of raw materials from its captive mines by maintaining a strong logistics network to deliver those raw materials to its plants. Moreover, it tries to make deliveries to its customers without any supply chain issues that further help TSL in realizing better margins than its competitors.
  3. Strong brand and distribution networks: TSL has a strong distribution presence around the globe. The Company’s pan India dealers and distributors grew to more than 13,500 in FY20. To directly reach steel consumers the Company is also leveraging technology and digital platforms, increasing market penetration.


  1. High debt: the gross debt level was at its peak after the acquisition of Bhushan Steel (Tata Steel BSL). The Company’s consolidated gross debt increased by around 4.6% from Rs 1,008.16 billion in March’19 to Rs 1,046.28 billion at the end of December’19. The Company is taking various initiatives to reduce costs and initiated measures to reduce debt by tightening up cash flows through working capital releases and reduction in Capex as much as possible.
  2. Operational issues in Europe: TSL’s operations in Europe have been struggling in the face of high raw material costs, slowdown in steel consumption especially in the auto industry (Automotive represents 35% sales by revenue in the UK) and imports of cheap metal, mainly from China.


  1. Make in India boost: India’s per capita steel consumption is currently at an average of 74 kgs versus a global average of 255 kgs per annum. With the expansion in steel-intensive sectors such as infrastructure and construction, consumption is expected to increase in an accelerated trajectory. National Steel Policy (NSP) provides preference to Domestically Manufactured Iron & Steel Products (DMI&SP). With a leadership position in key market segments and world-class production facilities TSL is in a good position to meet the rising demand with its current capacity and expansion plans in India.
  2. Moving beyond steel: To stay competitive and prepare for disruptions in the future, innovation is critical. During FY19, the Company developed 114 new products in India, launched 22 new products in Europe, while in FY20 TSL launched 155 new products in India. The new Materials Business is focusing on developing Fiber Reinforced Polymer (FRP) Composites and Graphene related products. This business has been set up to partially insulate revenues from the cyclicality of the steel business and respond to the growing demands of alternate businesses. The Company is targeting approx. 10% revenue from new materials by 2025.


  1. Mine auctions: A disruption in the supply of 45-50 MT of iron ore is expected in FY21 due to the expiry of about 37 working merchant mines on 31st March 2020 by the industry. Non-renewal of mining leases can lead to higher purchases from open markets at higher prices, adversely impacting the profitability of the Company.
  2. Slowdown in demand: Slowdown in global growth is adversely affecting steel demand and logistics constraints during coronavirus may further lead to disruption in operations.

Michael Porter’s 5-Force Analysis

Barriers to Entry

  • High capital requirements: The steel industry is highly capital intensive and the requirement to set up a new business or production plant is expensive depending on the location and technology utilization, which discourages the new entrants.
  • Government regulations: The governmental policies of India in context to steel producers have been favorable but there are few discrepancies with regards to land acquisition and iron ore mine acquisitions. For new entrants, regulatory issues pose a hurdle.

Bargaining Power of Suppliers

  • TSL has a value chain that is completely integrated. It owns mines that are critical to ensure a smooth supply of raw materials for its production processes and to maintain cost competitiveness. Hence, the bargaining power of the suppliers is low for the Company.
  • Steel prices have a high correlation with commodity prices. Normally, rising coal and iron prices are reflected in higher steel prices, therefore owning mines act as a hedge against this volatility. Therefore, for other players in the industry, who don’t have mining operations to meet their operational demands, the bargaining power of suppliers remains high.

Bargaining Power of Buyers

  • TSL has a high brand value and recognition. The Company provides high-quality products and maintains good relationships with its customers. Hence, the bargaining power of the buyers remain low. However, during times of crisis, when demand falls to a great extent, the bargaining power of buyers can be high.

Rivalry among Competitors

  • Globally the Company faces competition from imports of cheap steel from China. Domestically, as demand still exceeds supply, competition remains moderate with some major players like SAIL, JSW, and Essar Steel in the organized sector.

Threat of Substitutes

  • Steel remains a significant metal in automotive, infrastructure, and industrial market segments with better product designs that use high-quality steel with a longer life. Most of the sales of the Company are based on a contractual basis, along with this, they are continuously developing new products and materials to stay ahead in market disruptions and serve its customers’ evolving needs. Therefore, the threat of substitution remains low.

Branding and Other Initiatives

  1. We also make tomorrow
    The current branding campaign ‘We Also Make Tomorrow’, represents the steel maker’s commitment to building a greener and better tomorrow. The Company organized a change in branding, replacing ‘Values Stronger than Steel’ launched in 2011 with ‘We Also Make Tomorrow’ in 2018. This campaign shifts the Company’s focus from not only providing the best products but the products which help in making society greener and better for the future. The campaign has received more than 9 million views on YouTube and can really help the Company drive the sales of its B2C market segment.
  2. Scaling up digital channels
    During FY20, the distributor/dealer network increased by 11% YoY. ‘Tata Steel Aashiyana’-India’s first multi-brand e-commerce platform for Individual Home Builders recorded an annualized revenue of Rs.380 crores in Q3FY20. ‘Tata BASERA’ – leveraging distribution networks across Tata Group Companies realized a sales of Rs.114 crores between April 2019 to Dec 2019. Companies’ continued focus on digital channel expansion is improving market penetration and driving volumes.
  3. Total Quality Management (TQM) project
    TSL’s Shikhar25 program focuses on delivering superior product quality, optimizing product mix, and improving operational efficiency. In FY19, the Company implemented 427 projects, resulting in total savings of Rs 2,801 crore.
  4. Solid waste utilization
    TSL’s solid waste utilization is best in the industry at nearly 100% compared with SAIL’s 85% in FY19. TSL developed and launched India’s first-ever Linz-Donawitz (LD) slag branded products – Tata Nirman (for construction application) and Tata Aggreto (for building roads) engaging with government institutions like the National Highways Authority of India (NHAI) to promote the use of steel waste in road construction. In 2019, at the 8th National Fly Ash Utilization Conference held in Goa, Tata Nirman was the winner for Green Building Material. This development stems from TSL’s business ethos of being a benchmark in steel sustainability. The Company was recognized as Steel Sustainability Champion by the World Steel Association for the 3rd consecutive year in 2019.

Financial Analysis

  1. Europe business hurting the performance of the overall Company
    Steel production has high fixed costs and raw material costs. Covid-19 severely impacted the Company’s production and delivery operations across the region. With consolidated EBITDA of Rs.19,495 crores in FY20, India EBITDA comprised Rs.17,650 crores (90.5%). Europe business of the Company continues to be a drag on the overall performance of the Company. The EBITDA remained low during FY16 due to lower realizations and certain market headwinds in Europe. During FY19, EBITDA had peaked due to improved sales, lower expenses at Tata Steel Europe. During Q3FY20, the consolidated EBITDA margin was 10.3% with EBITDA per ton of Rs.5,003/t, whereas India’s EBITDA margin was 19.3% with EBITDA per ton of Rs.8,484/t due to lower steel prices.
  1. Deleveraging the Balance Sheet
    During the first half of FY19, the gross debt of the Company reached its peak at Rs.1,186 billion because of the acquisition of Bhushan Steel (Tata Steel BSL). Through strategic efforts, the Company reduced its gross debt by Rs.178.64 billion by the end of the year. The target of the Company is to reduce 1 billion dollars of gross debt every year. However, due to the current economic scenario and the pandemic, FY20 might shy away from this target. The strategies adopted by the management in reducing leverage are higher operating cash flows, working capital release, monetization of non-synergistic ventures like Southeast Asian businesses, and strategic restructuring. This is visible in the steady decline of the debt-to-equity ratio from its peak of 2.58 in FY17 to 1.49 in FY20.
  1. Good performance of Acquired Facilities
    TSL’s current liabilities during FY19 stood at Rs.596 billion as compared to Rs.557 billion in FY18, thereby witnessing an increase of 7.1%. Current liabilities marginally increased and stood at Rs.603 billion as of March 31, 2020. Taking the current economic slowdown into account, with scaled-down operations and lower capacity utilization, current liabilities are expected to increase further. Current assets fell 19% and stood at Rs 548 billion in FY19. However, due to management’s focus on financial management to ensure ample liquidity, current assets slightly improved and stood at Rs.559 billion in FY20. The current ratio of the Company has been declining since FY11, the management’s efforts have been successful in improving the ratio from 0.7 in FY19 to 0.9 in FY20, however it remains below the ideal ratio of 1.

The management has implemented policies to stabilize newly acquired facilities and integrating operations across the value chain. The total assets and liabilities for FY20 stood at Rs 2,504 billion as against Rs 2,336 billion during FY19, a growth of 7.2%. Management’s relentless focus on improving operational performance to efficiently use its growing assets has been evident from the increasing trend of Return on Total Assets till FY19 as seen below.

Note: Financial statements of the Company have been transitioned from previous GAAP to Ind AS (Indian Accounting Standards) from FY16.

Risk Analysis

  1. Mining leases: Non-renewal of mining leases can lead the Company to make purchases from the open market at higher rates, adversely affecting profitability.
  2. Safety risk: Employee, contractors, and equipment safety is of paramount importance to the operations of the Company. Non-compliance or delay in implementation of safety laws and regulations can lead to a stoppage of operations, damage to assets, and loss of reputation.
  3. Information security: With the growing use of technology in every aspect of the business, cybersecurity is critical. Without proper compliance and cybersecurity measures, the operations of the Company can be vulnerable.
  4. Trade measures: Withdrawal of favorable trade measures like minimum import prices, anti-dumping laws, countervailing duties and tariffs, and trade restrictions can impact profitability.
  5. Environmental risk: Steel production along with the wide geographical presence of TSL can leave a huge environmental footprint. Non-compliance with climate change-related regulations and extreme weather events can disrupt the supply chain and operations of the Company.

Corporate Governance

  1. The Company’s Board consisted of 11 Directors out of which 5 were Independent Directors including one-woman Director. This composition is in compliance with the Listing Regulations.
  2. Additional Director Mr. Vijay Kumar Sharma is a director at ACC Ltd and Mahindra and Mahindra Ltd. Independent Directors of Tata Steel, Mr. O.P. Bhatt is also an Independent director in HUL Ltd, Mr. Aman Mehta holds Directorship positions in Wockhardt Ltd, Godrej Consumer Products Ltd, Max Financial Services Ltd and, Vedanta Ltd. and Mr. Deepak Kapoor is an independent director in HCL Technologies Ltd.
  3. A Familiarization Programme is given to all Directors including Independent Directors. It involves a formal orientation, which is customized to suit an individual’s interests and area of expertise. During FY19, a Sustainability Workshop by the Cambridge Institute for Sustainability Leadership (CISL) was organized for the Directors and the senior management of the Company.
  4. 5 Board meetings were held during FY20, out of which 2 were held only by Independent Directors on November 5, 2019, and December 18, 2019. The Independent Directors evaluated the performance of the Non-Independent Directors and the BODs as a whole, they even assessed the performance of the Chairman of the Board and discussed various aspects relating to the flow of information between the Company, the Management and the Board.
  5. The Company has not entered into any materially significant related party transaction that may have a potential conflict of interests with the Company at large.
  6. Promoter’s shareholding increased from 33.12% as of March 2019 to 34.66% as of March 2020 raising investor confidence.

The End-Note

  • Keeping in mind the Indian operations, the management expects FY21 volumes to be close to FY20 volumes.
  • Currently, the Company has no material repayment obligations over the next couple of years.
  • COVID-19 outbreak and mobility restrictions have severely impacted TSL’s manufacturing operations. Industries are estimated to have lost about 2-3 months of output with disruption in global supply chains. Going forward reduced capacity utilizations may be the new normal, before recovering in FY21.
  • With its diversified funding source 48% in INR and 32% in USD, TSL can easily refinance its debts or raise more capital as the interest rates remain low across geographies. Tata group promoter, Tata Sons may also step in to provide support.
  • The management will need to take steps to conserve cash, maintain liquidity, and focus its Capex on few value-adding facilities and be ready to ramp up manufacturing as and when the economic outlook improves.

Disclaimer: The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade securities – involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. Leveraged Growth, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any Company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of Leveraged Growth. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Leveraged Growth to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically agrees to exempt Leveraged Growth or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold Leveraged Growth or any of its affiliates or employees responsible for any such misuse and further agrees to hold Leveraged Growth or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

Contributor: Team Leveraged Growth
Co-Contributor: Vishesh Gupta
Research Desk | Leveraged Growth

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